Template:M intro isda qualities of a good ISDA
Clear
The many purposes of the ISDA, most deal with the present (such as the availability of netting) or the past (reps, warranties and conditions to transacting), but only one deals with the future. The credit terms. These will only come into serious contemplation at times of extreme stress. The market’s, your management’s and yours. The more the firm stands to lose, the more extreme circumstances are likely to be. Your management will certainly be going mad — take that for granted — but likely so will the market, and quite possibly the geopolitical situation too. All kinds of people will be doing inexplicable things. Your customers will be AWOL. Bank chief executives won't be answering each other’s calls. Prime ministers will be ordering overseas embassies to max out their credit cards. The central bank will be ordering people to lowball LIBOR.
We do not imagine that, when they crafted its close-out mechanics, the ’squad had the wider general ambiance in which the ISDA’s s last-resort rights would be exercised. They can't have. We suppose they contemplated the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity. That there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down.
Rest assured, it will not be like that. There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management's. Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, many people — will want short, clipped answers to different questions they are all shouting at you at once. If you even understand the question, the last thing anyone wants to hear by way of answer is, “it’s complicated ” or God forbid, “The contract is not clear.”
This, we think — and we applied to say the JC seems to be on his own are about this one — recommends short, clear, plane, and blunt termination events addressing only generally catastrophic circumstances. The reality is that most of these are embedded in the pre-printed form of the isd master agreement itself. Do not mess around with these, and try to resist the temptation to unnecessarily augment them.